Georgia Supreme Court Finds Insurer’s Failure to Issue A Reservation of Rights Waives Ability To Contest Coverage Even If The Claim Is Actually Not Covered

In World Harvest Church, Inc. v. GuideOne Mut. Ins. Co., S10Q341 (Ga. May 3, 2010), the Georgia Supreme Court held that an insurer waives its right to deny defense or indemnity obligations if it fails to timely reserve rights and that the policyholder need not show prejudice for that rule to apply.

 In World Harvest, the World Harvest church was a defendant in an underlying action in Illinois involving the recovery of donated funds which had originated from an illegal financial scheme.  The church tendered the claim to its insurer, GuideOne, and (for some unknown reason) a sister company of GuideOne responded denying coverage for the Illinois action.  In the meantime, the Illinois court had dismissed the action on personal jurisdiction grounds.

 After the dismissal of the Illinois action, the underlying plaintiff brought an identical action in Georgia.  In response to World Harvest Church’s tender of the Georgia action, GuideOne actually defended the action for nearly a year before denying the claim and instructing appointed counsel to withdraw from the case.  Ultimately, summary judgment was entered against the insured in the underlying case and the case was settled for $1,000,000.

 Saddled with the $1,000,000 judgment, World Harvest Church brought an action against GuideOne seeking coverage for the judgment.  The insurer argued that its prior denial of the Illinois action, as well as oral comments by its adjuster to the policyholder questioning the availability of coverage for the Georgia action, sufficed as a legally adequate and timely preservation of rights.  The insurer further argued that the policyholder could not have been prejudiced by any delay given the claim was not covered.

 The Georgia Supreme Court rejected both of the insurer’s arguments.  While it did not reject the possibility of an oral reservation of rights being potentially legally effective, the Court found that the insurer’s statements and conduct were ambiguous.  Therefore, the Court held, the insurer was estopped from raising any coverage defenses given it had retained counsel and controlled the underlying defense.  The Court further rejected the insurer’s argument that the policyholder must show prejudice from the insurer’s actions.  Instead, the Court found that prejudice is presumed in those circumstances.

There continue to be differing decisions across the country regarding the effects of an insurer’s delays in timely reserving rights, including whether the policyholder must show prejudice before an insurer’s coverage defenses for indemnity will be deemed waived.  Here, the Georgia Supreme Court gave policyholders a substantial victory by finding a conclusive presumption of prejudice that prevents an insurer from seeking to avoid the legal effects of its delays in informing the policyholder of its coverage position.